Financial impact of the 2012 drought will continue through 2016

The 2012 drought impacted about every producer and consumer of the major commodities, including feed grains, forages, and livestock.

While amounts of crop insurance indemnities were the major yardstick of drought impact, there will be continuing impacts for years to come that will not be quantified by crop insurance.

Those include the impacts on the livestock industry, which was turned upside down with unavailability of feed, which in turn upset normal marketing schedules and created abnormal market prices. But the nightmare is not over.

For the livestock producer, and particularly the cattleman, the drought began in 2011 in the Southern Plains where pastures were decimated with heat the lack of moisture. It spread to 80 percent of the rest of the continental US in 2012 and continued into 2013, still in the Southern Plains and parts of the western Corn Belt.

Keep $77 billion in mind when the drought balance sheet is reconciled. That has been accomplished by Amanda Leister of Colorado State, and colleagues John Lee and Philip Paarlberg of Purdue. The trio of economists have analyzed the long term impact of the drought and attempted to quantify its disruptive impact on the cattle industry, which did not benefit from crop insurance indemnities paid to grain farmers.

In a nutshell, the economists define the overall problem by saying; “In the short term, drought causes increased crop and forage prices as well as decreased prices of live cattle when slaughter numbers increase due to herd liquidation.

In the longer term, crop prices remain above baseline levels resulting in animal breeding inventories which decline due to reduced expected returns. This herd adjustment leads to fewer animals moving through the U.S. meat supply chain over time. The decrease in animal slaughter in tandem with relatively high livestock prices in the longer term causes a significant decrease in consumer surplus over the eight year period of analysis.”

The economists say drought-induced marketing of cattle began in the April-June period of 2012, and continued in fits and starts until the current period. “The increased slaughter in 2011 is largest in the second quarter and falls in the third and fourth quarter. The data from the first quarter of 2012 suggest that beef cattle producers held cattle in the hope of better crop and pasture conditions the following summer.

As the drought did not improve in 2012, drought induced slaughter increases again. Because the increase in cattle slaughter must come from lighter backgrounder cattle being slaughtered early, there are corresponding decreases in the supply of background beef cattle flowing into the next quarter. The percentage changes vary, but the total head decrease experienced by background cattle is the same as the increase in number of head for finished beef cattle.”

Along with the abnormal volumes of cattle moving through the feedlots and into processing plants was the variability of cattle prices along with the high costs of forages and feeds. The economists say forage prices this spring were $80/metric ton (mt) above expected prices, as a continuing result of drought conditions. And they warn to expect that until late in 2016. Grain prices are expected to peak now in the third quarter of 2013 at $141/mt above expected prices. And they are expecting livestock producers to pay drought premiums for their grain until late in 2016.

Nebraska steer prices were used to define the impact on cattle prices, with early drops of $10-$13/cwt below expected baseline prices, then a $14/cwt premium price in the third quarter of 2012when cattle slaughter declines due to decreased herd sizes. Beginning in 2013, steer prices rise to $16/cwt above baseline prices and slowly declines through 2016 as herds are rebuilt.

The impact of the drought is spread widely:

Beef processors, for example, benefit from lower steer prices in the first year of the drought.

The greatest loss to processors occurs two years after the end of the drought.

By contrast, beef cattle producers are hit the hardest in the first three years of the drought.

The overall welfare impact for cattle producers compared to the baseline is a loss of $5.9 billion over the eight year period of analysis.

Hog farmers experience a loss in returns, relative to the baseline, over the first three years due to higher feed costs.

The poultry and egg sectors follow a similar pattern compared to hog producers; however, these sectors can adjust to higher feed costs at a faster rate.

With an estimated decline in income and increased costs of $11.3 billion relative to the baseline over eight years, the magnitude of annual loses to the dairy and milk industry is driven by the timing of high forage and grain prices.

Despite decreases in crop yields and production related to the drought, the gains in returns for grain producers generated by price increases for several crops outweigh the losses in production over the 8 year period of analysis.

When the balance sheet was reconciled, the economists propose a $77 billion dollar benefit from the drought, particularly for forage producers, grain producers and land owners receiving cash rents for pasture. The beef industry and the dairy industry lost money on the drought. The loss to consumers from 2011 to 2018 was quantified at $111 billion in terms of higher prices paid.

Summary:

The 2012 drought had a substantial impact on producers and consumers of commodities, but in many different ways. While livestock operators and consumers were major losers, winners included grain farm operators, forage sellers, and those owning land and renting it for pasture. The impact of the drought began early and will continue through 2016 as the livestock production cycle slowly returns to normal.

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